“3. Only one contention was urged on behalf, of the appellants before us: that the security deposit was taken from the respondents in order to ensure the due performance the contract and respondents having defaulted, the entire amount was liable to be forfeited. A similar contention was advanced before this Court but was rejected in Maula Bux v. Union of India . The appellant therein had entered into a contract with the Government of India for the supply of certain goods and had deposited a certain amount of security for the due performance of the contract. As in the instant case, it was stipulated in the contract there that the amount of security deposit was to stand forfeited in case the appellant neglected to perform his part of the contract. On the appellant committing default in the supply, the Government rescinded the contract and forfeited the security deposit. It was held by this Court that forfeiture of earnest money under a contract for sale of property does not fall within Section 70 of the Contract Act, if the amount is reasonable, because the forfeiture of a reasonable sum paid as earnest money does not amount to the imposition of a penalty. But, "where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he was already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty." It was further held that the amount deposited by way of security for guaranteeing the due performance of the contract cannot be regarded as earnest money.
